Compliance Considerations for Participating in the Web3 Secondary Market

With the changing landscape of Web3 investments, the secondary market has once again become the focus of investors' attention. However, participating in the secondary market requires not only consideration of investment strategies but also attention to compliance issues. This article will explore the legal boundaries and risks to be aware of when participating in the Web3 secondary market from a compliance perspective.

The Importance of Participant Identity

In the cryptocurrency Secondary Market, the identity of the participants determines the regulatory requirements they face. The compliance obligations differ significantly based on different identities.

Taking Hong Kong and the United States as examples:

• United States: Whether individual or institutional investors, anyone investing in tokens, options, contracts, and other products must comply with relevant regulatory requirements. Investors participating in cryptocurrency asset management products must be "qualified investors," and managers typically need to register as RIA or exempt fund managers.

• Hong Kong: There is currently no explicit ban on individual investors' participation, but trading platforms are required to hold a virtual asset trading license and must not promote high-risk products to retail investors.

Investors are advised to choose a compliance path based on their own identity:

1. Individual investors: Prefer to use local licensed trading platforms and register with real names.
2. Family Office/Small Fund: SPV or fund structures can be established through regions such as Hong Kong or the Cayman Islands.
3. Structured Fund Participants: It should be confirmed whether the manager holds the relevant legal licenses.

Choosing an Investment Platform

Choosing the right investment platform is crucial for Compliance. Currently, there are two main types of exchanges in the market: centralized exchanges (CEX) and decentralized exchanges (DEX).

CEX is usually operated by physical companies that have applied for regulatory licenses in certain regions, supporting user real-name registration, fiat currency deposits, and tax declarations. However, using CEX does not inherently mean compliance; it is also necessary to consider whether the platform has obtained licenses in the user's location.

Although DEXs do not have registered entities in terms of technology, using DEXs in many jurisdictions may involve higher legal risks, especially when engaging in derivative trading, leveraged trading, or high-frequency arbitrage.

Investors should:

1. Understand the compliance background of the platform being used and confirm whether it has obtained a formal license in your region.
2. Avoid using "black technology" to circumvent rules, such as anonymous wallet transfers, cross-chain bridges to bypass deposit and withdrawal controls, etc. These actions may be considered money laundering or illegal fund transfers.

Secure Deposit and Withdrawal

Legal and secure deposit and withdrawal are key to long-term participation in Web3 investments. For investors in mainland China, traditional OTC trading methods have become high-risk. Banks are tightening their scrutiny on large USDT exchanges, and using personal bank cards for OTC transactions may face the risk of card freezing.

In markets such as Hong Kong, Singapore, and the United States, there are some compliant deposit and withdrawal paths, but the premise is that investors need to clarify their identity and paths. It is recommended to use a legal, isolated identity structure, such as:

• Cayman SPV
• Hong Kong Family Office Structure
• Singapore Exempt Fund Structure

These structures can be used in conjunction with licensed institutions for currency exchange and clearing, facilitating the explanation of the source and destination of funds to banks and tax authorities.

Tax Declaration

Profits obtained in the cryptocurrency market usually need to be reported for tax purposes. Major jurisdictions such as the United States, the United Kingdom, and Singapore have incorporated crypto assets into their tax systems. Any form of profit earned by investors during trading, including arbitrage, airdrops, staking rewards, profits from NFT transactions, etc., should theoretically be reported for taxation.

Suggestions for high net worth investors:

1. Keep complete transaction records.
2. Hire a professional tax consultant/accountant to organize the income structure.
3. If participating in investment through an SPV or family office, it is necessary to arrange in conjunction with company law and tax treaties to confirm the attribution of income and jurisdictional responsibilities.

Conclusion

With the changes in the Web3 investment landscape, the Secondary Market has become the main battleground for liquidity. Whether individual investors or institutions, it is essential to actively identify their legal identity, choose compliant platforms, and clarify tax and fund flow paths. When participating in Web3 investments, it is crucial to always keep legal boundaries in mind and ensure that investment activities are compliant and lawful.